Dubai Debt Costs to Rise on $7.1 Billion Expo Spend: Arab Credit

Oct. 1 (Bloomberg) -- Dubai, which roiled markets with its
request to delay $25 billion of debt payments in 2009, faces the
prospect of rising borrowing costs if it succeeds in a bid to
hold the Expo 2020 World Fair, Bank of America Corp. said.

The emirate needs about 26 billion dirhams ($7.1 billion)
of infrastructure spending to host the event, HSBC Holdings Plc
analyst Patrick Gaffney said by phone. At the same time, Dubai
has approximately $42 billion of debt coming due over the next
two years, Charlotte, North Carolina-based Bank of America said.

“The possible increase in Dubai’s external borrowing needs
if it’s awarded the Expo 2020 could put pressure on the
emirate’s borrowing costs given the crowded maturity schedule
across Dubai Inc.,” Jean-Michel Saliba, an economist at the
U.S. lender in London, said yesterday in e-mailed comments.

Dubai’s credit risk has fallen in the past year amid a
series of successful debt restructurings, while those of its
regional peers increased. The yield on the emirate’s $750
million 7.75 percent bonds maturing in October 2020 fell 80
basis points last month to 4.58 percent yesterday.

“High Hopes”

Dubai has “high hopes” of winning, Sheikh Ahmed bin Saeed
Al Maktoum, head of the emirate’s Supreme Fiscal Committee, said
last week. Sao Paulo, the Turkish city of Izmir and Russia’s
Ekaterinburg are all competing to host the event, which takes
place every five years. The Paris-based Bureau International des
Expositions will announce its selection Nov. 27.

Dubai expects to attract about 25 million visitors based
around the theme of “Connecting Minds, Creating the Future”
and plans to build a 4.3 million square-meter exhibition area at
a site in the desert south of the city to host presentations
from 182 countries.

HSBC estimates that about 45,000 new hotel rooms will be
needed for the event, increasing supply by about 6.4 percent
every year until 2020 at a cost of more than 31 billion dirhams.

“The government is planning to spend about 26 billion
dirhams on infrastructure for which we do not know the funding
source,” HSBC’s Gaffney said in a telephone interview from
Riyadh on Sept. 29. “We estimate that a further 30 billion
dirhams will be raised through debt and equity from private
companies that are building hotels.”

U.A.E.-based banks have the capacity to lend a further 312
billion dirhams in real estate loans until 2017, Gaffney said.

Direct Support

The emirate probably won’t be able to count on direct
support from larger neighbor Abu Dhabi to help it repay debt
next year after it rescued Dubai from the crash with a $20
billion lifeline, Moody’s Investors Service said in a March
report.

The rating’s agency expects banks to be “very cautious
about funding some of the projects and businesses that may have
a limited economic value once the Expo is over,” Khalid
Howladar, a senior credit officer at Moody’s, said by e-mail
yesterday.

Dubai home prices rose 21.7 percent in the second quarter,
the fastest pace in the world, raising concerns that a second
bubble is in the making, a survey by broker Knight Frank LLP
showed. The emirate suffered one of the world’s worst property
crashes in 2008 when prices dropped by as much as 65 percent.

“Expo 2020 has the potential to trigger both a credit and
a real-estate bubble as exuberance around the event grows,”
Howladar said. “Despite strong economic growth indicators,
overall leverage across the banking system as well as public and
private sector companies in relation to the Expo needs to be
monitored closely.”

Dubai isn’t expecting to cover all the costs for the Expo
on its own. About $1 billion could come from foreign governments
for their country exhibits and another $1.7 billion of operating
expenses in short-term facilities from banks that will be repaid
from exhibition revenue, HSBC’s Gaffney said.

Economic Growth

A win would boost Dubai’s economic growth by about 0.5
percentage points in the run-up to the event and approximately 2
percentage points in 2020, Bank of America said. Gross domestic
product is set to expand on average 4.6 percent between 2012 and
2015, more than twice the growth of the previous four years,
according to data compiled by Bloomberg.

The cost of insuring Dubai’s debt for five years has fallen
10 basis points in the past year to 215 basis points yesterday,
according to data provider CMA, which is owned by McGraw-Hill
Cos. The average for Middle East and North Africa contracts
gained 33 basis points to 274.1 in the same period.

Asset Sales

Dubai has been accelerating asset sales to help raise
funds. Dubai Financial Group agreed in June to sell its stake in
consumer lender Dubai First to First Gulf Bank PJSC for 601
million dirhams, while Dubai Holding LLC has said it expects to
divest its 35 percent shareholding in Tunisie Telecom.

The emirate’s plans include the Dubai World Central
aviation complex south of its main urban area. It will have five
runways and annual capacity of 160 million passengers.

“Dubai is back in the good graces of the credit market,
however there are realistic concerns about the emirate’s still
high debt level and upcoming debt maturities,” Gus Chehayeb,
Dubai-based research director for the Middle East at Exotix
Ltd., said by e-mail yesterday. “Dubai’s ability to attain
financing for these costly projects will depend to a great
degree on how it handles its looming restructured loan
maturities.”